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Morningstar's Favorite Developed-Markets Stock Funds and ETFs

Whether you prefer an active or an index approach, our analysts say these are the best of breed.

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Note: This article is part of Morningstar's May 2015 International Investing Week special report.

If investing in U.S. stocks requires a dose of courage, investing in stocks from abroad requires an extra dose. After all, U.S. investors who own domestic-stock mutual funds and exchange-traded funds often are familiar with at least some of their funds' holdings, especially if the fund invests primarily in U.S. large-cap stocks. Plus, those stocks trade in the investors' native currency. With foreign stocks and the funds that invest in them, it's often a different story. Not only are U.S. investors faced with owning companies they may know little to nothing about, they may face the additional risk of currency movements adding or subtracting from a fund's performance.

One might argue that investors interested in diversifying their portfolios with foreign stocks are particularly in need of help from funds and fund managers with expertise in this area. That isn't to say that only actively managed foreign-stock funds will do. A foreign-stock index fund can provide diversified exposure to markets outside the U.S. as well as, if not better than, one run by a stock-picker. But whether you choose an active foreign-stock fund, an index foreign-stock fund, or both, it's important to look for funds that boast strong management, processes, performance, and parent companies, while also charging reasonable fees. These are the five pillars our fund analysts use to assign Morningstar Analyst Ratings to the funds they cover.

Using this criteria, our analysts have assigned each of the foreign-equity funds below--which invest exclusively or primarily in developed markets outside the U.S.--a Morningstar Analyst Rating of Gold, meaning they are among the very best of their type. It's a partial list, and Premium Members can click  here to see the full list of Gold-rated funds that qualify. (We've screened out institutional funds and those that are currently closed to new investors, which is why Gold-rated reader favorites such as  Dodge & Cox International Stock (DODFX) and  Oakmark International (OAKIX) don't appear on the list.)

We've also included some ETFs our analysts like for broad exposure to foreign developed markets; some of these are siblings of Gold-rated mutual funds.

Pure Developed-Markets Funds
 Harbor International (HIINX)
Star rating:   | Expense ratio: 1.10%
This actively managed foreign large-blend fund's managers take the long view, preferring companies poised to benefit from long-term structural shifts within their industry that may not occur for another three to five years. They also prize quality over value, preferring to pay fair prices for high-quality companies over low prices for poor ones. The fund's portfolio underweights energy and technology and overweights industrial, health-care, and consumer-defensive stocks.

 Vanguard Developed Markets Index (VDVIX) and  Vanguard FTSE Developed Markets ETF (VEA)
Star rating:
Expense ratio: 0.09% (Admiral & ETF share classes), 0.20% (Investor share class)

This index mutual fund and its ETF version both track the market-cap-weighted FTSE Developed ex-North American Index of large- and mid-cap stocks in Europe, Asia, and Australia, holding more than 1,300 stocks. Unlike funds that track the MSCI EAFE Index, its benchmark includes South Korea. At just 0.09% in expenses, these are among the least expensive foreign-stock funds on the market. (For mutual fund investors unable to meet the Admiral share class' $10,000 minimum, an Investor share class is available for 0.20% and a $3,000 minimum.) These funds also could be paired with a smaller weighting in a developing (emerging) markets fund to allow for rebalancing between the two.

 iShares Core MSCI EAFE (IEFA)
Star rating: Not rated | Expense ratio: 0.12%

This ETF tracks the market-cap-weighted MSCI EAFE Index of large-, mid-, and small-cap stocks in 21 developed markets in Europe, Asia, and Australia, or about 40% of the world's total market cap. The portfolio of nearly 2,500 stocks is dominated by blue-chip multinationals. The fund's expense ratio means it offers low-cost exposure to developed-markets stocks outside of North America. As with the above Vanguard funds, it could be paired with a smaller weighting in a developing-markets fund to allow for rebalancing between the two.

Funds With Developed-Markets Plus Emerging-Markets Exposure
 American Funds Europacific Growth (AEPGX)
Star rating: | Expense ratio: 0.84% (A shares)
This largest actively managed foreign-stock fund (with $136 billion in assets) relies on American Funds' multimanager approach, with each manager running his or her own sleeve of the portfolio based on his or her preferred style. One thing all have in common, though, is a long-term, buy-and-hold philosophy that limits turnover (currently at 28%). The fund's portfolio is well diversified, with more than 250 holdings (as of March 31) and includes an 18% stake in companies from emerging markets. The fund may require paying a sales load.

 Vanguard Total International Stock Index (VGTSX) and  Vanguard Total International Stock ETF (VXUS)
Star rating:
Expense ratio: 0.14% (Admiral & ETF share classes), 0.22% (Investor share class)
Investors looking to own nearly every non-U.S. stock in one tidy, low-priced package should consider these funds. They track the FTSE Global All Cap ex US Index of about 5,300 securities, representing about 98% of the world's non-U.S. investable market cap. The fund is diversified across the market-cap spectrum and regionally, with 13.5% of its portfolio made up of emerging-markets companies as of April 30. (For mutual fund investors unable to meet the Admiral share class' $10,000 minimum, an Investor share class is available for 0.22% and a $3,000 minimum.)

 iShares Core MSCI Total International Stock (IXUS)
Star rating: Not rated | Expense ratio: 0.14%
Similar to the Vanguard funds mentioned above, this ETF tracks a broad, well-diversified index of stocks outside the U.S. In this case, the benchmark used is the cap-weighted MSCI All Country World ex-USA IMI, which tracks large-, mid-, and small-cap companies from 45 developed and emerging markets. It uses representative sampling and owns about 3,400 of the index's roughly 6,000 stocks. Nearly 15% of its portfolio consists of emerging-markets stocks. The ETF's use of sampling can convey some tax advantages to U.S. investors holding it in a taxable account.

Adam Zoll has a position in the following securities mentioned above: DODFX. Find out about Morningstar’s editorial policies.